In 2016, blockchain startups raised some $200 million in Initial Coin Offerings (ICO), a new form of crowdfunding based on cryptocurrency tokens. This figure might not be much compared to the billions being poured in by VCs and Kickstarter-style crowdfunding, but it shows a huge year-over-year growth for blockchain crowdsales.

Some of the startups have raked in millions of dollars with barely more than a promise and a website; several have failed to deliver on those promises.

As is with blockchain itself, expert opinion is highly polarized on the crypto–tokencrowdfunding hype, its reliability, its legality and its future. Here’s what you need to know.

How does it work?

In a nutshell, projects launch an ICO by issuing crypto-tokens on the blockchain (usually the Bitcoin or the Ethereum blockchain), giving early investors the chance to acquire tokens in exchange for cryptocurrency.

ICOs are usually limited by time or a cap on the amount of funds raised. The value and number of tokens released can be static or calculated based on the amount of funds raised.

Crypto-tokens have become an easy way for blockchain startups to fund their projects early in the development cycle, and for regular users and enthusiasts to invest in projects of potential value and have a say on how their future is shaped.

Where do crypto-tokens stand legally?

The legal classification of ICOs and crypto-tokens remains murky and a point of contention. They borrow traits from both IPOs and traditional crowdfunding (e.g. Kickstarter, Indiegogo), while at the same time they bear enough difference to avoid fitting into any of those categories.

They do not account as donations because they give crypto–token purchasers a stake in the company and a right to vote on future decisions. Neither can they be called the cryptocurrency equivalent of stocks.

The U.S. Securities and Exchange Commission (SEC) and their counterparts in other countries have remained largely silent on whether crypto-tokens account as securities. A framework put forth by Coinbase, Coin Center, Consensys and Union Square Ventures tries to weigh in on the issue but stops short of providing a definite answer, part of which is due to the unregulated nature of the blockchain itself.

Others, such Preston Byrne, blockchain expert and COO at Monax, are more vocal in their dismissal of token sales as being legal at all. “Real investments are legal in nature in that they specify the rights and obligations of the parties to them and have to follow certain, entirely arbitrary formalities to be valid and binding,” Byrne said in a Slack conversation. “And they rely on the courts for their enforcement.”

Many view ICOs and crypto-token sales as fraudulent schemes for a quick money grab.

If an issuer fails to meet investors’ expectations, such as abstaining from repaying a loan, investors can then go to a court and seek performance, perfection of title to collateral or damages in order to be made whole for their losses.

“Tokens, on the other hand, usually disclaim that any legal relationship exists between the token-seller and the investor at all,” Byrne says. “Fortunately for the law, legal obligations around the marketing of investments are arbitrary and exist no matter how loudly token-peddlers may protest that ‘this time it’s different’ or that ‘blockchains represent a new paradigm.’ The difference between a legal scheme and an illegal one is whether there is a legitimate, legal investment opportunity — a real business with a legal obligation to the investor to deliver something — that underlies it.”

Byrne underlines that coin offerings often don’t follow regulations and purport not to create any legal obligations for the scheme promoter to deliver anything in return to the investor. “Indeed the scheme promoter often expressly disclaims these obligations in their offering documents,” Byrne says. “At the same time the scheme promoter, expressly or impliedly, makes it known to the investors that profits may be expected from the scheme.”

Are crypto–token projects a scam?

Many view ICOs and crypto–token sales as fraudulent schemes for a quick money grab.

Building on his previous arguments and referring to the FTC definition of pyramid or Ponzi schemes, Byrne clearly stipulates, “In my informed opinion, many ‘coin offerings’ run the risk of being seen as closer to Ponzi schemes of the past than they are to legitimate investment products of the present-day. Draping an investment scheme in advanced cryptography and Silicon Valley futurebabble won’t change that. I’m frankly stunned that some of the best minds in venture capital can‘t see what’s right in front of them for what it is.”

Byrne’s perspective is echoed by other experts, who describe them as “snake oil,” scam tokens and outright mistakes.

In many cases, startups have launched their ICO without due diligence and by offering little more than a vague whitepaper and a flashy website.

“It appears that many of the groups running cryptocrowdfunding/ICOs/crowdsales are often deliberately giving outlandish promises with the goal of collecting as much funds as possible, without considering the long-term trust implications, especially for people watching from outside of the crypto-economy,” says Stas Oskin, core developer at WINGS.ai, a decentralized platform that aims to address some of the problems that riddle cryptocurrency investment. “This can lead to tarnished brand images for these projects, funding difficulties in the future for the teams involved, but also an overall impression that the space is just too early to get involved in.”

But the rising skepticism hasn’t prevented companies from raising funds through crypto-funding. WINGS itself raised more than $1 million in its first round of ICO. Golem, a decentralized computing platform, raked in $8.6 million in mere minutes in a November ICO. Lisk, a blockchain application platform for JavaScript, collected 14,000 bitcoin (BTC) in its crowdfund in early 2016. And ICONOMI, a platform for managing ICOs and crypto–token projects, scored a $10 million-plus funding in its September token crowdsale.

Some believe the future of the investment landscape will have no place for ICOs and cryptocurrency tokens.

Why does the investor hype surrounding crypto–token continue? A lot of it has to do with the one-time success of Bitcoin and Ethereum, experts believe.

“The main thing that’s going on is crypto enthusiasts have experienced significant gains from BTC and ETH in the past few years and are now overweighting vision and underweighting execution when making investment decisions,” says Nick Tomaino, principal at Runa Capital. “The crypto market has set the bar shockingly low for entrepreneurs to raise money and this is dangerous for everyone involved.”

In a blog post where he weighs in on the “irrational exuberance around ICO investing,” Tomaino describes cryptocrowdfunding as fundraising getting done based on vision rather than any semblance of execution. “This has been a problem on Kickstarter for years and I’m fearful we’re going to see a lot of the same in the ICO world,” he says.

Otherwise, blockchain technology and blockchain investment are still nascent, and there are a lot of kinks that need to be ironed out. “The fact is that blockchain services have a real potential to disrupt huge industries like banking or insurance,” says Tim Zagar, co-founder at ICONOMI. “But, as they are very new, there is not much of a track record to go by. So the investors can choose either to wait for certainty and lose the potential of a large payout or accept the inherent risk — because the potential payout is worth it.”

The future of crypto-tokens

Some believe the future of the investment landscape will have no place for ICOs and cryptocurrency tokens. In a post titled “Against Crowdsales,” Hivemind developer Paul Sztorc, warned against crypto–token crowdsales in general, saying, “If you ever ‘invested’ in a crowdsale, you made a big mistake. It’s OK, maybe you didn’t know any better. Until now.”

Others believe it will depend on the investors and whether they push project developers to abide by a set of universally accepted rules. In a Medium blog post, Tomaino proposes a set of best practices that investors can use to vet crypto–token projects and determine whether they’re worth investing or not.

The practices include transparency, presenting a viable and testable model, a cap on funds and a control on liquidity. But above all, Tomaino believes, it’s the team itself that matters.

“Ask any professional VC what the most important aspect of early-stage investing is and they’ll tell you it’s people,” Tomaino says. “ICO investing is very similar to early-stage startup investing. The biggest thing being missed currently is people overweighting the importance of the idea and underweighting the importance of the people behind the idea and ability to execute — this isn’t something that technology will solve anytime soon. Investors need to assess the people behind the project and make sure that they’re quality.”

Several startups are working on programs and platforms that will make it easier for both investors and startups to overcome the challenges of crypto–token projects.

“Very often, blockchain startups are amazing technology teams that lack business experience, which leads them to underestimate the value of market research, sales or even a good revenue model,” ICONOMI’s Zagar told me. ICONOMI, Zagar explained, recently initiated a mentoring program to protect ICO investors while helping projects clarify their business proposition and business plan.

ICOrating is another company that has set up shop recently to offer analytical research and assessment of ICO projects to potential investors. The website presents a list of past and ongoing crypto–token projects along with their details, ICO progress and level of integrity based on the analysis done by the company’s experts.

Only time will tell whether ICOs are just another dot-com bubble ready to burst.

Other companies are pushing for more transparency by leveraging the power of the blockchain itself.

WINGS’ platform for creating and managing decentralized autonomous organizations uses the power of the blockchain community to evaluate and rate tokens. “The most important factors as always are understanding the team, the technology, the market potential and the timing,” says Dominik Zynis, communications lead at WINGS. “That can be really hard — if not impossible — for someone who is not crypto-savvy.”

Zynis further stresses that it can be hard to trust random analysts on the web, especially when their interests and goals are not known.

WINGS gives teams the ability to transparently weigh the sentiment toward their crypto–token project by using the power of crowd intelligence. The platform’s community analysts evaluate tokens via forecast markets, and get accountable and transparent incentives for the accuracy of their forecasts. The votes, history and credibility of each participant is stored on the blockchain.

“We think that this system can be used as a standard like a good housekeeping seal of approval,” Zynis says. “If WINGS forecasters take their financial rewards seriously then over time people will notice that projects that don’t launch with WINGS carry a higher risk factor of failing.”

Another startup worth following is OpenLedger, which is developing a number of synergistic ecosystems and platforms to enable startups to strategize, promote and execute crypto–tokencrowdfunding campaigns.

OpenLedger’s team is working to develop a business model that will purportedly provide the blockchain community a source of investment opportunities. At the same time, the team has developed a due diligence checklist that it uses to assist startups through the conceptualization and launch phase and help them vet their projects before going public.

Adel, a self-regulating blockchain startup incubator, is working on an ecosystem based on the Nxt blockchain-as-a-service platform to assist in the proposal and development of blockchain projects. Members can get help on solidifying their proposals for funding by introducing their projects to the Adel community and receive advisory services in various fields such as finance, marketing, tech and law.

Adel will ICO in March 2017.

It’s still too early to see if any of these initiatives will manage to bring order to the chaos of the crypto–token landscape. The fintech industry is still ripe for disruption and only time will tell whether ICOs are just another dot-com bubble ready to burst or a new form of the investment that will drive a wedge between traditional venture capital and centralized crowdfunding and carve itself a permanent niche.

In the meantime, if trends are any indication, crypto-tokens will continue to absorb huge amounts of cash in 2017.